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Cramdown is a slang term that refers to the discretionary powers that may be employed by a bankruptcy court when a company is attempting to submit a reorganization plan. Essentially, cramdowns are situations where the court chooses to confirm or amend a plan of reorganization even if some of the creditors involved have serious objections to the final draft of the plan. A cramdown may be employed when the court determines that the company seeking bankruptcy protection is making a sincere effort to do the best it can to recover from a financial setback and continue to function.
While the cramdown is not an uncommon phenomenon, most courts choose to make use of this ability sparingly. Often, the court will entertain detailed explanations from creditors as to why a given plan is not acceptable to one or more of the classes of creditors. At the same time, the court will hear from the company seeking protection through bankruptcy, in an attempt to ascertain all factors relevant to the reorganization. Generally, the court will seek to mediate the situation so that the company and creditors are able to both support the plan. However, if this is not possible, the court can choose to initiate a cramdown and settle the issue.
The cramdown can be in favor of the plan presented by the company, or an alternative plan that is presented by a class of creditors. It is also possible for the court to determine that a third reorganization plan that encompasses elements of previously submitted plans may be in order. Ultimately, the court will attempt to approve the plan that is in the best interests of all parties concerned.
Once the court issues a cramdown, the reorganization plan is approved and the process of bankruptcy will proceed. In the event that the company fails to comply with the terms outlined in the approved plan, the court can also take additional actions that will help to protect the rights of the creditors even though the company has entered into a default situation.
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